Question

A contract was signed with the hotel to provide food and beverage services for all breakfasts, lunches, and breaks and for dinners on three of the four nights. The total cost of these services was $13,000. A deposit of 20% is required in December (two months prior to the conference), with the remainder due in January.

1. When should the expense for the food and beverage services be recorded on your organization’s income statement?

What is the effect on the financial statements (balance sheet and income statement) in November? In December? In January? In February

Answer 1

According to accrual concept, the income and expenses are recorder as and when they are actually earned and incurred respectively but not when they are received and paid.

Expenses are recorder if they are incurred irrespective of the payment.

Incomes are recorded if they are earned irrespective of the receipt.

Here also, the service is going to be provided after 3 months but the deposit is received 2 months prior to the conference.

Therefore, the amount which we received is not yet earned untill we provide the service against that amount,we should show it as liabilities.

After we provide the service we should close the liabilities and transfer it to the income statement

In the month of December, January and February income statement will not be effected because it is not an income to be recorder it is a liability. But we need to show the amount received as a liability in balance sheet.